Friday, May 27, 2011

eBay/PayPal paving the way for huge mobile payments patent suit against Google

As a consumer and from an industry point of view, I want healthy competition in the field of electronic (and increasingly mobile) payments. I personally like (and have been an early adopter of) a number of Google services. For example, Amazon just sent out my second Android-based smartphone (Samsung Galaxy S2). So I would really want Google to compete fiercely with e-payment powerhouse PayPal (a wholly owned eBay subsidiary) on the basis of honest, independent innovation.

The complaint basically says that Google negotiated a partnership with PayPal but at a point when the two companies were allegedly very close to a formal agreement, Google poached PayPal's chief negotiator Osama Bedier and, at around that time or not much later, Stephanie Tilenius (now a senior vice president at Google) and some other key people, some or all of whom are now accused of stealing eBay/PayPal trade secrets.

Trade secrets are an intellectual property right. So are (among others) copyright, trademarks, and patents. In my opinion, the stage is set for a subsequent patent infringement suit by eBay/PayPal against Google. I don't know whether it will happen next week, next month, later this year or sometime next year, but having analyzed the situation and in light of certain parallels with the Skyhook v. Google dispute, I see a very high probability of patent assertions by eBay/PayPal. It would really be a highly logical thing to happen. I can see reasons why eBay/PayPal might still wait a little bit, possibly even a year or so, and I'll explain those possible reasons in more detail further below. The two most important possible reasons are that eBay/PayPal might want to previously make some headway with the first lawsuit (especially at the discovery stage) and that some eBay patent applications particularly relevant to Google Wallet may currently be under examination but issue in the near term.

In order to have the appropriate context for the patent dispute that I believe is now looming LARGE, let me firstly talk a little bit more about the trade secrets, breach-of-contract and unfair competition lawsuit that has already been filed.

I mentioned Skyhook before and blogged about that dispute about three months ago. Skyhook had deals with Android device makers (particularly Motorola and Samsung) in place to ship their geopositioning software but it appears that Google (including Android chief Andy Rubin) then interfered and bullied those manufacturers so they dropped Skyhook's technology in favor of exclusively using Google Location Services.

Skyhook filed an unfair competition suit as well as a simultaneous patent infringement suit last September. Unfair competition is also the legal theory behind one of eBay's and PayPal's nine causes of action, and I already said that I'll talk about the patent aspect further below.

It's possible that the controversy over mobile payments will also raise similar issues as the Skyhook case did. That might happen if some Android device makers opted to use a competing service, such as PayPal, and if Google then used what it calls its "club" to make device makers do what Google wants (its control over the Android trademark and certain closed-source components, particularly the Android Market client), then we'd have a perfect mirror image of the Skyhook case.

But even without the "openness" issue, eBay's and PayPal's lawsuit is already a bigger disaster for Google. The eBay/PayPal group is a much more powerful and famous plaintiff than Skyhoook, and this complaint makes Google and its leadership look ruthless and sleazy, compared to which it's a lesser evil to be accused of just being "not open" and heavy-handed (except in the eyes of genuine, unbiased and truly independent advocates of Free and Open Source Software, which are hard to find).

Paragraph 45 of eBay's and PayPal's complaint makes a high-ranking Google executive appear unbelievably thoughtless: apparently Google Senior Vice President Stephanie Tilenius poached a former PayPal colleague via a Facebook (!) message (which may have been read by any number of other PayPal folks) during a period for which she had, allegedly, an explicit contractual obligation not to do so.

Considering this early stage of the process, eBay's and PayPal's allegations are already amazingly detailed and specific. They don't just make vague assertions; they quote from particular messages (even email and text messages) and state particular dates on which certain things happened. They also describe how some confidential data was allegedly copied, in contravention of employment contracts, to a Dropbox account as well as a non-corporate email account.

Besides some PayPal-specific issues the complaint also restates the often-heard accusation of Google being a data hog that doesn't respect people's privacy, claiming that "Google Checkout is mostly a tool for acquiring customer information for the benefit of Google's other products and services", an accusation that appears very tough since Google probably wanted and still would like to make money with its Checkout service.

The broader picture is that Google's ethics and business practices are now at issue in an antitrust case in Texas, a full-blown European Commission investigation, the Skyhook dispute, antitrust complaints filed by two South Korean search engine companies in connection with Android, and now the eBay/PayPal complaint. According to Reuters, the Federal Trade Commission of the United States is seriously considering a broadbased antitrust investigation as well. It's generally noticeable that the competition law issues facing Google are increasingly related to its dealings in the mobile sector -- disproportionately much when considering that it represents just a fraction of Google's overall revenues, but less surprising when taking into account how much is at stake there.

The way Google appears to deal with competitors and "partners" (such as Android device makers) as well as its frequent conflicts with intellectual property law are not only in sharp contrast with its "Don't Be Evil" meme but have also made Google a number of powerful enemies in recent years.

I saw that the world-class law firm of Orrick, Herrington & Sutcliffe represents eBay and PayPal against Google. Orrick did and maybe still does a fair amount of work in the past for Apple, Microsoft and Oracle. Those three players also have intellectual property issues with Android. Microsoft recently filed the first-ever antitrust complaint (note that "antitrust" in this context does not include "merger control" matters) in its history against Google (with the European Commission). Microsoft sued Google over a trade secrets issue (like eBay's and PayPal's case related to the poaching of an executive) years ago, and Google just hired the law firm that defended its behavior in that context (Keker & Van Nest) to now become the third law firm to defend Google against Oracle's patent and copyright infringement assertions.

Everyone knows that Google and Facebook are at loggerheads. It recently turned out that Facebook had hired a PR firm to propagate unfavorable information about Google. That revelation temporarily distracted from Google's own practices, but with eBay's and PayPal's complaint, the spotlight is again on "the Plex".

Apple, eBay, Facebook, Microsoft and Oracle are a pretty impressive group of five companies taking issue with Google. Then there's the possibly very complicated relationship between Google and Motorola. Like I said, Motorola was the first company to be bullied by Google out of a partnership with Skyhook, and rumors have recently been flying that Motorola is considering building its own mobile operating system to regain control.

Google is increasingly isolated. The relatively best friends it now has among major industry players are probably IBM and Red Hat. Those like the idea of exploiting open source the way Google does, and that's probably their common denominator.

When a company faces the situation eBay and PayPal describe in their complaint, i.e., employees join a competitor and allegedly use confidential information against their former employer, there are basically three kinds of causes of action (legal theories) that come into play:

Contract law: employment agreements (including non-compete covenants) and related non-disclosure agreements and guidelines accepted by the employee. eBay and PayPal do make reference to them. Microsoft is currently doing so quite successfully against an employee who went to Salesforce. It's also possible that eBay and PayPal could obtain injunctions against one or more of their former employees now working for Google on mobile payments. Enforcing general non-compete clauses appears very difficult in California due to a ruling in 2008, but it could be that PayPal employees agreed to particular terms that are enforceable.

There's significant leverage in the fact that such rights are asserted against the former employees. From a liability point of view they aren't necessarily fully covered by their new employers. eBay and PayPal assert breach of contract and other theories against two executives who joined Google (Osama Bedier and Stephanie Tilenius) and reserve the right to sue up to 50 (!) other individuals, who are currently referenced in the complaint by a placeholdder ("Does 1 through 50").

Basically the courts have to draw a line: employees should have some choice to leave an employer and take a new job, but it depends on what their contracts say, how much overlap there is between the original job and the new one, and other circumstances. [Update] In its first official reaction to the complaint (quoted by, among others, CNN.com), Google tries to portray those employees' behavior as just a normal way to exercise their freedom to pick a new job: "Silicon Valley was built on the ability of individuals to use their knowledge and expertise to seek better employment opportunities, an idea recognized by both California law and public policy. We respect trade secrets, and will defend ourselves against these claims." [/Update]

Generally it's easier to use those contractual rights to prevent further violations than to take action against what has already occurred. Damage claims can also be based on those theories, but competition law and, above all, intellectual property law can give (depending on the circumstances) the original employer much more leverage.

Hiring employees from competitors for the purpose of using a competitor's confidential information can be deemed one of many manifestations of unfair competition. In the eBay/PayPal vs. Google case, the fact that someone was poached while negotiating with Google on PayPal's behalf looks particularly bad.

But in most cases of this kind, companies will (as eBay and PayPal have) also bring intellectual property rights into play. If an infringement of such rights is proven, it is often possible to prevent an unfair competitor to continue to make use of some of that confidential information if it's of a technological nature.

Intellectual property rights are diverse. If an employee actually copies source code and then incorporates it into a competitor's code base, that would (at least) constitute a copyright infringement. However, eBay and PayPal don't make any such assertion (at least at this stage). Instead, the kind of intellectual property they are explicitly asserting now is called a trade secret. It relates to information whose confidentiality companies protect. The world's most famous trade secret is the Coke recipe. And the very opposite of a trade secret, and in most fields of technology a more powerful device, is patent law. Let's now look at the role of those different IPRs in connection with eBay and PayPal.

Of those intellectual property rights, patents are, at least in connection with software (even if maybe not in a field like pharmaceuticals), often infringed inadvertently. Intentional infringement does happen, and if it happens, it can result in treble damages under U.S. law. But the way patents work is that everyone has the theoretical (even if not always practical) option to check on public patent registers (such as the USPTO database) and steer clear of infringement. There are too many patents to do that, but that doesn't give anyone the right to infringe a patent.

If you litigate, a patent dispute is fundamentally about whether the accused product or service practices what the asserted patent teaches (provided the patent is valid). Only if willful infringement is alleged, there's an additional need to evaluate whether the defendant acted intentionally or not.

With trade secrets, the question of how the information was misappropriated is an essential, indispensable part of the consideration. That makes it harder to prove. But in terms of a company's or a person's reputation, the alleged theft of trade secrets is "really bad stuff": there's no moral (even though not legal) excuse of inadvertent infringement. With patents, you're morally innocent until proven guilty (even if proven to infringe, with the possible consequences of an injunction or damage awards against you). With trade secrets, if a court rules against you, you're inevitably exposed as a convicted thief.

If eBay and PayPal can prove a misappropriation of trade secrets by people now working for Google -- or even before the end of the lawsuit at least achieve that strong indications for such misconduct show up in discovery --, then Google will have a terrible reputation as an infringer (in terms of an employer of infringers) in connection with Google Wallet. And at that point any patent infringement allegations would have even more weight.

eBay and PayPal could also have tried to file two parallel lawsuits. The one they just filed is based on California state law. Trade secrets are recognized by U.S. federal law, but they aren't part of it, unlike patents. Patent disputes are filed with federal courts. In that case, the logical venue would be the U.S. District Court for the Northern District of California (where Oracle is suing Google). Maybe there will be a near-simultaneous patent suit these days. Perhaps eBay and PayPal wanted the public to initially focus on those breach-of-contract, trade secret and unfair competition issues, all of which deal with willful nasty behavior, which isn't always the case in connection with patents.

But eBay and PayPal are economically strong and can afford to wait. They may want to firstly make some headway with the first suit. There's also another reason for which I could imagine why they might want to wait with a patent suit:

This dispute is about rather recent technologies related to mobile payments. PayPal had filed for 11 now-granted U.S. patents before and shortly after being acquired by eBay, and eBay has 188 U.S. patents in its own name. But the patent examination process at the USPTO takes years. It's fairly possible that some of the technologies about which the "deserters" may have told Google and which are likely relevant to mobile payments were developed and patented just in recent years, and maybe some important patents could be issued during the next year or so and greatly enhance eBay's and PayPal's ability to make patent assertions against Google Wallet.

An obvious question is whether Google would be able to countersue eBay. While Google's own patent portfolio is relatively weak, it is yet bigger than eBay's patent holdings. Google apparently doesn't have any patents it can use against Oracle, and even if Google actually acquired Nortel's patents, it might not have any serious ammunition to use against a company that's mostly about enterprise software. But with eBay and PayPal it's possible that some of Google's patents (even certain search patents) might represent a credible counterthreat. That would be another reason for which eBay and PayPal might rather wait until they get particularly relevant patents (relevant in terms of mobile payments) granted.

While eBay's and PayPal's Santa Clara complaint does not mention the word "patent" even once, its paragraph 9 mentions eBay's "substantial intellectual property in [the field of online and mobile payments]". And that term does, as I explained, include patents. Also, I'm convinced that any settlement between Google and eBay/PayPal would certainly address patents as well. It wouldn't make sense to leave that question unaddressed.

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About Me

Florian Mueller is a former award-winning intellectual property activist with 25 years of software industry expertise spanning across different market segments (games, education, productivity and infrastructure software), diverse business models and a variety of technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof.) He is now developing a game app for smartphones and tablet computers.